Master Limited Partnerships

Haven't posted in a couple days, my following isn't that large, so my motivation is somewhat like a singer or stand up comic with three people in the audience. Ever heard of Master Limited Partnerships? Better yet, do you know what they are? Most likely you don't have any of your portfolio allocated to MLP's. Chances are this little asset class of roughly 70-90 companies in the entire US and Canada are overlooked.

What are they? MLP's are a specific tax structure afforded to a small amount of companies that are involved in the transportation, refinement, distribution of oil, natural gas, jet fuel, propane etc. Basically these companies are essential services to the US to keep energy moving from Canada to the US, from Texas to Massachusetts etc. Essentially if you want to run a pipeline from Montana to Texas and your name is Donald Trump, you can't set this up, you need to get Federal approval. These companies essentially operate a toll booth business model, which is regardless of the price of oil or nat gas as long as it's moving through the pipeline you must pay a toll, Tollbooth Willie Style! http://youtu.be/cyrHxeb_eTI

Taxes? The tolls generated from these pipelines are distributed to shareholders as "return of capital" for the most part and partial income.  Try to follow my example here to get an idea of the distribution and tax structure, this example should also answer the question of why you typically only want to own individual MLP's in non-retirement accounts.  If you buy 100 shares of an MLP at $10 a share, that's a $10,000 investment.  Say for example the first quarter distribution from the company was $1.00 a share or $100.  The $100 distribution is treated as a portion of "return of capital" and "dividend income".  The return of capital lowers your cost basis in the stock.  So in this case, $100 distribution, let's say 80% of the $100 is considered return of capital.  You get $100 in your brokerage account and your original $10,000 investment basis will now be reduced to $9,920.  ($10,000 less your $80 return of capital). The $20 that is income will be taxable in the year of the dividend.  Over time, as you get more and more "return of capital", your cost basis should in theory eventually disappear.  So if your cost basis in the future has been reduced to $0 and you sell the stock, your gain would be taxed at long term capital gains rates. 
Taxes Continued....Because the tax structure is somewhat different than your typical company, the tax forms are often a little different too.  For example, when you bank account or standard mutual fund distribute a dividend or interest, you get a 1099 DIV or 1099 INT at the end of the year.  With MLP's you don't get a 1099 unless you are in a Mutual Fund pool of MLP's or an ETF or ETN.  Individual MLP's get a K-1 tax return at the end of the year.  These K-1's can
be delayed for various reasons, but at the end of the day, they aren't required to be sent by Jan 31st as with your mutual funds and bank account statements.
 
How do I invest?  (You can invest in individual companies, but these are 4 main ways to get basket expsoure)
MLPYX-Oppenheimer MLP 40  6.16% Yield
AMJ-JP Morgan Alerian 4.78% Yield (this an exchange traded note)
AMLP-Alps Alerian MLP ETF  5.94% Yield
MLPAX-Oppenheimer Steelpath Alpha 6.01% Yield

Alan Levine in Financial Advisor Magazine March 2013 highlighted MLP's, compelling article.
http://www.fa-mag.com/news/mlps-performing-well-13475.html

I love MLP's and have owned since 2009, I recommend a 5% allocation to a diversified portfolio.

S&P 500 Dividend Aristocrats Index

The S&P 500 Dividend Aristocrats is a index of large cap blue chip companies that have been paying increasing dividends year after year for at least 25 years. This is an equal weighting index and there is no way of directly investing in an index. These dividend paying companies are across all industries, not just utilities or financials. Compared to the S&P 500 the Dividend Aristocrats have outperformed on 1year, 3year and 5 year basis and past performance is not indicative of future return. Performance as of Dec 2011 1yr. S&P 500. 2.11% 1yr. Div Aristocrats. 8.33% 3yr. S&P 500. 14.11% 3yr. Div Aristocrats. 17.84% 5yr. S&P 500. -0.25% 5yr. Div Aristocrats 4.59% As of March 1st 2013 there are 54 constituents and the top 10 are as follows: Archer Daniels midland ADM 2.37% Abbvie Inc ABBV 4.18% Grainger WW. GWW 1.40% Clorox CLX 3.04% Kimblery Clark. KMB 3.41% Procter & Gamble PG 2.93% Leggett & Platt LEG 3.76% Cincinnati Financial CINF 3.60% Genuine Parts GPC 2.99% Chubb Corp CB 2.07%

Ford Motor Co

In January Ford Motor Co increased it's dividend from 5 cents a share to 10 cents, a 100% increase, which obviously goes along with our Dividend Wealth of growing your income to temper the effects of inflation.  The yield as of this this writing is 3.24%.  I can't take credit for seeing this increase in advance, however portfolio manager Michael Levine of Oppenheimer Fund runs the Oppenheimer Equity Income Fund (OAEIX) mentioned Ford in Dec of 2012.  Levine in a 2012 interview highlighted the prospects of Ford "Levine sees promise in the whole sector but says that Ford, which survived the recession without a bailout, is especially compelling. Its stock is trading at just eight times next year's earnings. Ford's shares have suffered because of skidding sales in Europe, but Levine thinks its results will improve as it shrinks its manufacturing capacity in the region. In the meantime the company offers a 1.7% dividend yield. Because it has a rock-solid balance sheet, he says, Ford has the wherewithal to bulk up its payout by at least 50% over the next year."

Several Wall Street research firms have a price target of 20 on Ford, which closed at $13.24 today.  Ford generated $1bn of cash flow in Q4 2012, which supported this Jan 2013 dividend increase.  The company has paid down $21bn of debt over the previous 24 months and appears to be executing on its turnaround.  Ford has delivered 14 consecutive quarters of profitability in North America. With gas prices around $4 a gallon in the Northeast perhaps it will drag a bit on short term performance.  Nevertheless, it's dividend and pension-derisking efforts seem to be working.  Now that Ford is returning a larger amount of cash to it's shareholders, it should attract attention to dividend wealth seekers at 3.24% yield. 

Technically speaking the stock went from just under $9 in July/August of 2012 to $14 in Jan 2013, so the stock has pulled back after a substantial run up.  On the daily chart the stock is somewhat oversold, but on the weekly chart the stock could pull back into the $11-to-$12 range, which might be an ideal entry point for longer term dividend oriented investors. 

Monthly Dividend Payers

Frequency and timing of dividends is obviously a factor when considering an investment.  Why?  Frequency of compounding is why. 
$10,000 invested at 4% compounded annually over 5 years is $12,166.52
$10,000 invested at 4% compounded semi-annually over 5 yrs is $12,189.94
$10,000 invested at 4% compounded quarterly over 5 years is $12,201.90
$10,000 invested at 4% compounded monthly over 5 years is $12,209.96

Maybe it matters, maybe it doesn't, but for some their rent is due monthly, not quarterly.  So here is a list of 20+ monthly dividend payers to consider for your portfolio.  Yields as of 02/22/2013

Templeton Global Bond-TGBAX  5.90%  Yield 
Doubleline Total Return-DLTNX  5.83%  Yield
TCW Emerging Market Bond-TGINX 5.08% Yield
DWS Interm Tax/AMT Free-SCMTX  2.80% Yield
Pimco Investment Grade Corp Bond-PIGIX  4.64%  Yield
Franklin Income A-FKINX  6.00% Yield
Vanguard GNMA-VFIIX  2.63% Yield
Loomis Sayles Bond Retail-LSBRX 5.45% Yield
Blackrock GNMA-BGPAX 3.37% Yield
Lord Abbett Short Duration-LDLFX  4.01% Yield
Northern High Yield Muni-NHYMX 4.36% Yield
Pimco Real Return Instl-PRRIX  2.67% Yield
First Eagle High Yield-FEHIX  6.10% Yield
DWS Massachusetts Tax Free-SCAMX  3.81% Yield
Victory Income Fund-GGIFX  4.67% Yield
Legg Mason Global Opportunities-GOBIX  3.10% Yield
Vanguard Long Term Treasury-VUSTX 2.84% Yield
Gabelli Utilities-GABUX 4.39% Yield
IShares Investment Grade Corp Bond-LQD 3.87% Yield
Vanguard Intermediate Term Bond ETF-BIV  3.10% Yield
SPDR Barclays High Yield Bond-JNK 6.72% Yield
IShares S&P US. Preferred Stock-PFF 5.95% Yield
Cohen & Steers Select Preferred Stock-PSF 7.35% Yield
LTC Properties-LTC 4.71% Yield
Pengrowth Energy-PGH 13.94% Yield
Atlantic Power Corporation-AT 11.12% Yield
Realty Income Corporation-O 4.09% Yield

Pimco offers 16% Yield

In a low interest world I see alot of people stretching for yield as evident in my previous post from Kiplinger Magazine.  In order to get higher yield, you have to essentially take more risk.  That risk could come in the form of moving from bonds into stocks, or moving from safer bonds, like those issued from the US Gov't to bonds issued by companies with less than stellar financials.  If you want yield, you need to make sure you understand the risk that comes along with it.  

While this site isn't interested in finding the highest yields, we are looking for a good balance of safety and income.  Today however, we are deviating from script to make a point.  We are going to look at Pimco Real Estate Real Return (PRRSX), which has a 16.70% yield paid quarterly.  This fund was just moved from 4 stars to 3 stars by Morningstar on Feb 4, 2013.  This fund has a 5 year standard deviation of 38.  By comparison, most large cap stock mutual funds have a standard deviation of 17-20.  PRRSX has essentially double the volatility of a 100% large cap stock fund.  So in your search for yield, don't just look at yield alone.  To make my point, this fund lost 47% in 2008.  If you have $100,000 invested and it drops to $53,000 or 47%, in order to get back to $100,000 your now $53,000 investment has to increase 88% just to get back to even. Losses are magnified and much more painful, so make sure you are aware of the risks. In the following two years, 2009 and 2010 the fund did earn back the 47% drop returning 54% and 39%. 

Likewise, we are big fan of dividends that are safe and somewhat predictable.  The rule of 72 states that you divide a return by 72 to find out how long it would take for your money to double.  A 8% return every year for 9 years would double your money (8% x 9years = 72).  If you take that same rule and divide 72 by 16% yield, you should technically double your money every 4.5 years.  $10,000 invested in PRRSX 5 years ago would be worth $19,724 today. 

Dividends are a very important part driver of overall returns in your portfolio and can help you temper uncertain or certain market volatility, but make sure you understand the risk and don't just look at yield alone.  Also speak with your financial advisor about the proper weighting and risk in your portfolio and overall investment plan as it pertains to making any investment decisions.  Whether risk is a preference or a requirement, make sure you understand the risk and most importantly that you can afford the risk. 

Kiplinger's 25 Income over 4%

Kiplinger Magazine highlighted 25 choices that yield over 4% to provide income.  We own or have clients that own four out of the 25, but be careful about the advice you recieve, alot of these fund are high income, aka junk bond funds, which by nature invest in companies that are less creditworthy.  Obviously when it comes to credit quality, we start at the top with Triple-AAA, which would be goverment bonds backed by the US Gov't and it's powers of taxation.  Next would be Double-AA, which are typically municipal bonds and some select corporations.  The third level down would be Single A, which would typically be well known corporations.  Then we would move to Triple BBB and then BB.  The lower grade you go, the higher risk and thus higher the yield or income.  However, all income isn't created equal, so make sure you check with your financial advisor before taking a position, particularly in high yield bonds.  In addition, a few of these positions utiltize leverage, which can be good and bad, it's like fuel for a car, it can make the car go faster, but it can also make it blow up. 

NLY-Annaly Capital 13.52%  (we own)
GOV-Gov't Income Properties Trust 5.72%
HCN-Health Care Reit 4.74%
O-Realty Income Corporation 4.08% (pays monthly)
BPT-BP Prudhoe Bay Royalty Trust 11.43%
BIP-Brookfield Infrastructure Partners 3.82%
PAA-Plains All American 4.01%  (still own in certain portfolios)
SPH-Suburban Propane Partners 8.16% Yield
AEP-American Electric Power 4.17%
NGG-National Grid (ADR) 5.98%
NTT-Nippon Telegraph & Telephone ADR 4.04%
VNR-Vanguard Natural Resources 10.77%  (not affiliated with "Vanguard" the mutual fund company)
FAX-Aberdeen Asia Pacific Income 5.68%
AWF-Alliance Bernstein Global High Income 7.10%
KTF-DWS Municipal Income 5.72%
PFF-I shares Preferred Stock 5.95%
NUV-Nuveen Municipal Income Common 4.27%
PCN-Pimco Corporate & Income Strategy 7.21%
BJBHX-Artio Global High Income 6.94%
DLTNX-Doubleline Total Return 5.63%  (we own)
FAGIX-Fidelity Capital & Income 5.30%
FNMIX-Fidelity New Markets Income 4.28%  (certain clients own)
LSBRX-Loomis Sayles Bond Retail 5.45%
MWHYX-Metropolitan West High Yield Bond 6.60%

First DividendWealth Post

I was watching WealthTrack this morning and they highlighted Franklin Income Fund.  Has paid a monthly dividend since 1948 and currently has a 5.76% yield. This mutual fund is a Conservative Allocation fund, but has 42% of the portfolio in stocks, which is a little bit higher than the traditional conservative model around 20% equity, but perhaps they feel strongly to overweight equities, relative to bonds.  This fund has an income mandate, so it won't hold alot of cash, but feels that it can offer the same amount of income by shifting to stocks.  The case in point it's top holding Merck, which the stock is yielding 4.15% and is more than it's paying on its long term bonds. 

I took a look at 8 Dividend Mutual Funds and 2 Dividend ETF's and found that out of their top 10 holdings, the two most common top holdings were Exxon Mobil and Chevron.  Chevron yield is 3.13% and Exxon Mobil 2.58%. 

The other major holdings among the dividends funds I analyzed looked like a portfolio of Warren Buffett's.  American Express, WellsFargo, CocaCola, and IBM to name a few.  Buffet's stock holding 90% pay dividends, there is something to be said about dividend paying companies. 

Vanguard Dividend Growth-VDIGX  had a return of -25.57% in 2008 while it's benchmark the S&P 500 was down -37%.  In addition, take a look at a dividend ETF, Vanguard Dividend Appreciation-VIG, which was down -26.63% in 2008 versus -37% for the S&P 500. 

Dividends don't protect against losses in the short term, but over longer term periods dividend paying stocks don't have a losing 10 year period in history.